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Justice Stephen E. Neel of the Commonwealth of Massachusetts recently granted State Street Corporation’s motion to dismiss a derivative complaint after concluding that the independent directors of the State Street Board of Directors (the “Board”), on the recommendation of a Special Committee advised by STB, acted in good faith and pursuant to a reasonable inquiry when they rejected the shareholder’s litigation demand.

In October 2007, the Plaintiff shareholders demanded that the Board remedy alleged harms to State Street, including bringing litigation against certain State Street officers and directors. The Firm was retained to advise a Special Committee of directors during the Company’s investigation. After the Board considered the findings of that investigation, the Board rejected the Plaintiffs’ litigation demand. Plaintiffs initiated a derivative action and State Street moved to dismiss pursuant to the Massachusetts Derivative Statute, which was amended in 2004 to provide that a derivative proceeding commenced after the rejection of a demand shall be dismissed if the court finds that independent directors determined in good faith after reasonable inquiry that the maintenance of a derivative proceeding is not in the best interests of the corporation.

The specific issues before the Court were (1) the qualifications of an independent director and (2) the standard of review for whether a board made a good faith determination after conducting a reasonable inquiry. Neither issue had previously been addressed by a Massachusetts court under the amended derivative statute. After examining the process and investigation undertaken by the Special Committee advised by the Firm, the Court agreed with STB’s conclusion that the directors who rejected the demand were independent and, therefore, the Court held that the decision to reject the demand was protected by the business judgment rule.

The case is Pinchuck, et al. v. State Street Corp., et al., No. 09-2930 (Suffolk Super. Ct. Jan 16, 2011). Michael Chepiga, Laura Murphy and a team of former associates assisted in advising the Special Committee of the Board during the demand investigation. Erika Burk and Susan Cordaro assisted in the drafting of the subsequent motion to dismiss and the affidavit submitted in support thereof.